this is "options action," your front row seat to the smart money. tonight, palm payout. dan nathan taught you how to triple your money off palm's pain. >> the thesis hasn't changed one bit and if anything i'm actually more negative. >> now he's got your next move. plus the best buy? making money off best buy's earnings whether its stock goes up, down, or nowhere at all. mike khouw will tell you how. and jackpot. an options strategy on las vegas sands that could break the bank. scott nations deals you a royal flush.

"options action" begins right now. and welcome to the show. i am melissa lee, and these are the "options action" traders, coming to you live at the nasdaq marketsite, the world's third largest options exchange. certainly a busy expiration friday, moving stocks around, but a critical week for the markets is just ahead. let's get in the money right now. some are worrying that they are reading the options pit and see cautious signs ahead. >> expiration friday, especially when it's quadruple witching, which sounds really exciting, that's what expiration was today, everybody wants to focus on what was going on that was expiration related. but guess what, those options are expired, that story is over. i think what we should really pay attention to here is what options traders are suggesting is going to happen in the market going forward. and what we're seeing, over the last two weeks, was very low volatility in the s&p. the market's not moving around a whole heck of a lot. about 9% on an annualized basis. how much is that? about half a percent a day would be what you would expect on

average. but if you go out three to six months in the s&p options, the forecast is a lot more dire. they're saying, okay, volatility's likely to be a lot higher. what does that tell us? they're cautious. i would say that options traders are suggesting that we might be due for a pullback. >> well, yeah, and not only that. i mean, options traders, stock traders, the market -- the s&p is at a 52-week high, or as of, you know, yesterday. and you know, we've rallied about 12% off the lows from mid february. and you know, we're head into an earnings period that could be very volatile. we saw it back in january. the market opened up the year up a few percent, and then as soon as we got into the meat of earnings, i mean, we sold off hard. and you know, it went for like a few weeks. what have we done now? we've actually come back and made a new high. so when i look at that chart you see up there, i see a couple support levels. one of them is right where that 100 day moving average is. about 5%. about a 50% retracement from the lows. so i think option traders are getting in front of it. >> and mike makes a great point about option volatility and what we expect.

let's look at the vix, which again is an expectation of how much the s&p we expect again to move around, and we talk about how relatively low it is. and it is certainly low in the context of the last 18 months. but in the context of march, april going into summer, when things tend to slow down, it's not that low. so the vix is saying, hey, we could have a pullback, we could have some action, we could have some wimpiness and volatility. >> that's exactly right. if you go back to the last time the s&p was about as volatile as it is right now, which was 2007 before the crisis hit, the vix, those futures that scott's referring to actually were about ten ticks lower. that's a lot, folks. >> let's talk about some catalysts for next week. certainly earnings, always catalysts. oracle has a huge report, especially for the tech sector, dan. >> oracle is going to be a very interesting one because this is one of the biggest tech companies out there. and not only that, they sell their products, you know, around the world. okay? so a lot of tech investors, a lot of investors banking on a global recovery are going to be looking at the guidance here. now, there's also some very company-specific things as it relates to oracle. they just closed the sun microsystem deal. and you know, these guys are a serial acquirer. they buy big companies every year, and what they do is they just grab cost savings out of

those companies and they get to this 20% plus earnings per share growth every year. so that's very company specific. but there's also adobe and red hat, there's a bunch of other guys. so people are going to be focused on this one. >> so what's your directional thesis here? >> well, listen, i think that this is one because i just mentioned those cost savings, you know, investors are going to look very closely at what the company can wring out of sun microsystems. so generally, i think it's going to be bullish and i think their trends are very good, and they're also going into -- the guidance they're going to give for their may quarter is their fiscal q4. their salespeople close a lot of deals. they have a lot of incentives to do that. so it's a seasonally strong quarter. i want to be bullish here. but here's the thing. the stock is up from 14 last year. a year ago. it made a 52-week high this morning of 25 and change. so you may want to be a little cautious here. if you own some stock, you may want to sell some and try to replicate that economic exposure through options or if you're inclined to buy the stock here you can also do it through options. >> so you've got a risk reversal, but before we go into that, into the specific strategy, we want to pull out

our playbook because we do like to explain how we do these strategies and why we do these strategies. so dan, this is your trade, in fact. but start us off with strikes. >> well, strikes in a risk reversal, i just want to make this very clear, this is very different than let's say a call spread, a vertical spread is that we explained last week. this is a riskier trade. this is not for everybody. but when i pick strikes i'm going to be selling a put strike that i'd better be very comfortable about owning the stock at that level. >> exactly. mike, time frame. this is easy. it's earnings. >> well, in this case we definitely have a catalyst and oftentimes you will -- one of the things you want to take a look at is how fast do you expect the stock to move if the direction that you're trying to play here. you know, typically you're not going to go out a very, very long time although sometimes the options can set up that way. i usually look for about a three to six-month time frame. but a little bit less or a little bit more might be appropriate. >> and the caveat is this does tie up some capital in your account. >> that's right. there are a couple of different costs here with a risk reversal. one is the headline cost, that is, how much do you pay or collect from one option to another. but the bigger, probably more

important cost is the fact that because you have to be willing to buy this stock, if it falls very far, your broker's going to force you to leave quite a bit of margin in your account and that's a cost also. >> dan, let's get straight to the trade. >> the trade very simply is in a risk reversal we're doubling up on the risk. i'm going to sell a put and i'm going to use the proceeds of that and buy a call. okay? what does that do? it gets me long at two different places at expiration. what i want to do with oracle here, i want to look out a couple months and i want to look to june. i want to buy the june 23-26 risk reversal. i want to pay 25 cents for that. so i'm selling the june 23 put for 55 cents. i'm using that premium to buy the june 26 call for 80 cents. okay. so i have two break evens. i have one up higher and one lower. so june expiration i get long at 26 bucks. i own that call. i paid 25 cents for the whole package. on the down side i also get long. okay. so this is where we said you're selling a put.

i'm selling the june 23 put. so i would get long at two levels. up 4% or up -- excuse me, or down 8% on june expiration. and so to me what i like in this trade structure is if you're inclined to buy the stock here or you want to buy it a little lower this gives you some -- >> that seems to be key there. you have to be willing to own the stock there. >> you definitely do. but let's try to compare this to buying the stock, actually. if you bought the stock, you highlighted that there would be some margin issues, but actually there would be greater margin issues if you ran out and just bought the stock right here. the risks to the down sides that you're going to own it 8% lower. by the way, the s&p up since the beginning of this sort of run here almost 7%, which is sort of commensurate with where you'd be getting long. so sort of saying to yourself okay, if the market gives up kind of what it's been making over the last two weeks that's where you're going to get long in oracle. i think that's a great trade. >> this is a perfect example of why i like risk reversal. and remember collar's kind of the opposite of risk reversals. but this is a perfect example p why i like risk reversals. dan's only paying 25 cents for the passenger but he gets long the stock if it rallies only a dollar, and it has to fall more than $2 before he gets the stock

put to him. so i like that relationship. i like that ratio. and you know what, if the stock ends up not really doing anything and i decide, hey -- and it is up inside those strikes at expiration, then you know what? no harm, no foul. i can move on to my next trade. >> giving up 1% of the stock price in that case. >> let's move on to your next option here. electronics retailer best buy will release its results on thursday. before we get the options trade from mike, let's get the technical setup. time for a call to the charts with our man, carter worth of oppenheimer. carter, certainly a lot of bullish sentiment on best buy in recent days. goldman sachs upgrading the stock today. what do you see, though, in the charts? >> absolutely. so an excellent actually event today. it gets an upgrade, as you refer, and from the biggest securities firm of all, and it doesn't move the stock, which is a tell. by my work. let's look at the pattern. a low at 15, a triple to 45, and a key break of that trend line

in the january, february sell-off. and then a huge rally from 35, touched a high of almost 42 today, up 18% off this low versus 11% for the s&p. it's just back to where it should stall out and actually really go dead. and the tell being it doesn't move at all really with an upgrade from a prominent firm. look at the long-term chart. i've got a five-year here. and this really shows you kind of what you're up against. so the well-defined down trend line since the '07 peak when most retailers peaked. and this really is why, and our thesis is that this will be very much a dead animal. and therefore an options strategy is what's likely here and the best bet. >> carter worth, thanks for that technical analysis. the bottom line from carter's peek into the charts is that best buy, destined to go nowhere. all right. mike, we're headed into earnings season. there's a lot of hype about this 3-d product cycle going on and l.e.d. tvs and so on and so forth, but you also believe it's dead money? >> well, i think there's really two issues. there are some very exciting products out there. that could be a strength. there are other people who are suggesting that just from a

consumer perspective how much longer can they keep spending the way they have been. there are some people who are suggesting that, you know, what we have is a lot of cheap money sloshing around. i think one of the things i would say here is there's also an issue of whether or not the market in general is stretched. if we do feel that way, and i think we are seeing some tells that that might be the case, then one of the things you might look to do is do an overwrite strategy on this if you're inclined to hang on to the stock. >> walk us through. >> what i'm looking at here is selling the june 43 strike call. i'm going to collect $1.50 for that, which is about 3.5% of the stock price. basically, i have about 8.5% to the up side between now and june expiration. so if -- you know, if the upgrade actually is well placed and the stock performs well between now, i still get to participate. i still get to collect a little bit of a premium. if the stock sits around here and i actually have a little bit of insulation if the stock falls. >> dan, what do you think of the trade? >> i like it. this is a trade for a buy and hold investor. you know, i tend to be a bit more trading oriented. so one of the things that i would say is if i'm going to

sell that premium and cap my up side, okay? i'll take that premium and buy a put. we talked about collars last week. because if it's dead in the water and there's something that can make the stock go down, we talked about the market's up 10% off the lows. i want some protection. that's what i would be selling that for. that's what i would be giving that up side away for. >> i think sort of sticking with the thesis of what the analysts are recommending, the stock did get that upgrade, i think that's sort of what you're thinking the backstop might be a little here, but i do hear what you're saying. >> and i'm on the record. i love covered calls. i love buy rights. and this is one a great example of why these things work out because mike's trade can make money if the stock goes up, down a little bit, or sideways. if goes sideways it's a home run. so it can make money no matter what happens. >> what will change your view? best buy will announce its earnings next week. the conference call comes up and they'll say 3-d is great, we're selling out across all of our stores. that is the expectation. how would you trade? >> that is a phenomenal point. one of the reasons you like doing an overwrite with this and

the catalyst coming up is a lot of the premium in that option is likely to get sucked out of it, as scott likes to say. you know, if the stock does go up and it goes up sharply, this call will likely appreciate, but some of that premium's going to come out of it. and if you think after you hear you that want to revisit the strategy you can always buy that thing back, and i think that might be -- >> implied vol in almost every single stock gets crushed following earnings. so mike's got that working for him. >> okay. at the top of this show dan gave you a risk reversal, mike actually had a similar trade with our parent company general electric. he put the trade on for free, and it is up a ton. there's even more money, though, to be made in this strategy. his next move, after this. >> time for "pump up the volume," the names that are heating up option traders' sizzle index this week. a pilot of the portable computing revolution, its market share has shrunk along with its popularity, culminating this week with a woeful forecast and a pair of zero dollar price targets. now options oracles are betting on the demise of this device maker. who is it? the answer when "options action" returns.

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welcome back to "options action." you just heard how palm puts were heating up that sizzle index, but dan, you've been watching this name for quite some time, you've been bearish on this name for quite some time. >> i was bearish. i made a very cardinal sin. i was bearish in fighting a trend last year but it ended up paying off and then i actually was a bit early and got a bit contrarian, and that ended up turning things upside down on me. you know, that's a great lesson. you know, sometimes stick to your guns and don't be contrarian just for the sake of being contrarian. that said, you know, this is a one-way train in the last few weeks here since they preannounced in late february the stock has gone from, i don't

know, 11, 12 bucks right down in a straight line to 4. the volume today after the earnings and the guidance was four times its daily volume. you know, there was some savvy put buying early in the week. the story is an outright disaster. i think that the management should be taken out and you know what. >> that hits it right on the head. i can actually understand how you got a little bit contrarian in there. largely because all of the -- every comment that came out of management here would sort you steer you in the other direction. that was really the backstop on the way down, the thing that sort of slowed it down. then of course the truth comes out and it's not pretty. and that is exactly -- >> but if you ignore what management said and you look at what people said about the devices, people liked the devices. >> loved the devices. >> so i mean i think what this says is not necessarily that management is -- >> hang on. >> by the way, they are hiring a hitman right now and they're looking for -- >> listen -- >> their space is not big enough for this many devices. >> i disagree. it is big enough. i'll tell you what isn't big enough. it's not big enough for management touts and p/e

partners that -- they sold 20 million shares to wall street, to investors, to mom and pops at home. at 16.25 in september. based on bogus guidance, based on bogus projections. and no one called them out on it. and the street, they helped them underwrite that offering and they let it happen. and it's disgusting. >> speaking of p/e partners, elevation partners, we invited roger mcnamee onto the halftime report. ahead of the preannouncement. we told him, we told his representatives we would ask about palm. shortly after that they cancelled. that was in february. >> ooh, that's not good. >> so that's just fyi there. >> i did something every trader has to do sometimes. i'm still long the stock. i sold most of my position this morning. it was a hate sale. you know, it may go higher. it probably goes lower. but it's not going to go much higher at this point. >> time now for the up side call. we'll show you how to manage a winning options trade. when you risk less you increase your chance of success of course. and last month mike risked nothing and made a lot. on "options action" there's only one rule.

risk less to try and make more so you can increase your odds of success. and that's exactly what mike did with our parent company, general electric. >> i'm looking at the -- at a 15.17 risk reversal. >> i'm sorry, mike, can you simplify that? >> and i just can't say it any simpler than that. >> thanks, mike. that's why i'm recording this. mike is bullish on ge, but he was looking for technical analysis to guide his options trade. enter carter worth. >> for the first time outperforming the market as it sits here 15, 16, 15, 16, 15, 16, and ultimately should come up and out of that tight range. >> wise man, thought mike. now that carter had his back, mike was convinced ge's stock was going higher. so he bought the june 17 strike call for 75 cents. now in order to make money mike needs ge's stock to rise by more than the costs of the trade, or 17.75, by june expiration. but technically speaking that's a lot of dough.

so to reduce his costs mike then sold the june 15 strike put and collected 75 cents, instantly increasing his odds of success. how's that? well, between the 75 cents mike spent buying one call and the 75 cents he took in selling one put, mike didn't shell out one penny. and now he only needs ge's stock to move a little to make a lot on his options trade. but nothing's free. so what's the trade-off? well, by selling the 15 strike put, mike could be forced to buy ge's stock should it fall below that put's strike price. no worries, though, because since the time of the trade mike and carter have brought only good things to ge, as shares have rallied 13%. now two men find themselves unlikely partners. united in the pursuit of a common goal. profiting off cnbc's parent company. and "options action's" biggest backers all want to know the same thing.

what will mike do now? >> all right. this is why we talk these strategies. let's do some stocks versus options. had you bought 100 shares of ge on january 29th, it would have cost you just over 1,600 bucks and you would have made 175. not bad. but mike's risk reversal cost nothing and can now be sold for 130 bucks. bravo to mike. past is prologue. you're only as good as your latest trade. so mike, what do you do now? >> here's the interesting thing. this is always the interesting situation. we're now long the option that's decaying more rapidly. one of the things you want to take a look at typically is if you're short the down side put and it comes in under value the disciplined trader is going to look to cover that. in this particular cast i don't think there's a tremendous amount of risk that ge's going to fall, but i tell you what, i'm just going to stick to the routine. so i'm going to cover that down side 15 put. i'm going to pay about 20 cents for that. to help finance that purchase

and actually collect a little additional premium i'm going to sell the up side 19 calls against it for 50 cents. net-net i'm going to collect 30 cents. at this point i have nothing but up side. basically, the worst i'm going to do is make 30 cents on this trade, but i'm still going to actively participate. if the stock goes up to 19 i'm going to make some more money. >> the best thing about mike's new trade that he has on is he has taken the problem of erosion off the table, and i think that's the best part of this trade. i think that's even better than buying this worthless put-back, is the fact that he's not going to get crushed over time as erosion hurts this trade. >> no doubt. and you know, back to the playbook, you've got to cover that put. it's a teeny option. you don't want to be short it. ge does have the potential to be volatile. if there was ever another financial crisis in the year 2010. you know what i mean? so you don't want to stay short that stuff. but what he's doing is selling that up side call and locking in his profit. it's brilliant. >> that's important because ge is regarded as a financial, essentially. so there's volatility there. there's probably volatility in ge. >> and you don't want to leave that put out for three months. >> good point. got a question send us an e-mail and we will answer it during the one on one web extra. we've got a special buy right

with scott. go to our website, optionsaction@cnbc.com. that is right after the show. traders at td ameritrade are a demanding bunch. in fact, they want it all. you know, when i place an order, don't just fill it. get me the best available price. a better price means more money in my pocket. that's why td ameritrade's proprietary order routing technology consistently seeks the best available price. i've got quotes, charts, watch lists. just the way i want them. mission control? right here. command center 2.0 lets you customize your trading space. no risk, no reward. but i need to know what the risk is. my secret? backtest... backtest... backtest. strategydesk lets you backtest your trading ideas to help you choose the best ones and it's free. with superior tools like these, traders get what they want.

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time now for the final call. the last word from the options pits. scott. >> we're heading into summer. option prices tend to moderate a little bit during the summer. but you know, let's pay attention to what happens over the next week or two as we head into expiration because this could tell us how option traders think the next earnings cycle is going to play out. >> dan? >> yeah. oracle reports next week. the option market is implying about a 5% move over the last four quarters the average move has been about 6 1/2%. if you think the stock's a little extended but you think there's more up side maybe look to june risk reversals maybe the june 23, 26 risk. >> mike. >> ge i'm going to cover the down side put in that risk reversal and sell the 19 calls against it to help finance it

collect a little bit of money. i'm also going to keep my eyes on chesapeake the only enp company that's up today. traded three times its average daily volume. somebody bought a lot of april 25 calls there. >> looks like our time has expired. for more "options action" go to our website, optionsaction.cnbc.com. our thanks to the traders. i'm melissa lee. we'll see you right back here next friday. >> "options action" web extra. more trades, more insight, more strategies. exclusive info you can't get anywhere else. get the action you need with "options action" web extra. only at optionsaction.cnbc.com. right after the show. ds of independent investors? let's ask. when you're trading a stock, every penny counts. i hate when the trade is done and you find out you paid more than the quote price. i want it at the price i expect... or better. td ameritrade's unique trading platform uses multiple market centers to help you find the best possible price. i like those odds.

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